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My question is related to part b.
Why B transfers 20.00 unit to A for price=65? the rule says that the transfer price should be greater than the marginal cost of b(=$20)-minimum and maximum – the lower value of:
1. external price, which is 65 and
2. marginal revenue, but A sells different product (bath and the fittings from b are just part of the final product.
So how to set the max price? should each of the divisions make max profit or the company as a whole should make max profit?
In the results the max price is 65 just not to demotivate b? i don’t get it, b has a spare capacity. If it is 60, a will have greater profit for $4.300, b lower for $100 and the company=4.300-100-4.200 greaterThe answer in fact actually says that any transfer price between 20 and 65 could be used – it has only used 54 to illustrate.
The total profit made by the company will be the same whatever transfer price (between 20 and 65) is used.
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